Choe, B.-H., Climate Finance under Limited Commitment and Renegotiations: A Dynamic Contract Approach, Journal of Risk and Financial Management (2026)
First-best Benchmark
 (a) Climate cost C_FB(G) |
 (b) Dynamics of GHG stock |
 (c) Adaptation and mitigation funding levels |
 (d) Adaptation and mitigation funding shares |
Figure 5. First-best benchmarks. Author’s own elaboration.
Second-best Simulation
 (a) Difference in climate cost: C(w_t, G_t) − C_FB(G_t) |
 (b) Difference in GHG stock: G_SB,t − G_FB,t |
 (c) Promised contribution value: w_t |
 (d) Total funding: I_t |
 (e) Adaptation funding: a_t |
 (f) Mitigation funding: m_t |
 (g) Adaptation share: a_t / I_t |
 (h) Mitigation share: m_t / I_t |
Figure 6. Comparison of dynamics under the first-best and the second-best (SB) contract for probabilities of contract enforcement rho in {0.80, 0.85, 0.90, 0.95, 1.00}, with initial total funding set to 8% of the first-best level in 2015. Author’s own elaboration.
The author does not numerically solve the full Bellman problem in this repository because a global solution is computationally intensive and highly sensitive to grid construction and interpolation choices. Nevertheless, a full-solution implementation can reproduce the patterns shown in Figure 6.